Rapid economic growth or high inflation would improve Greece’s prospects for survival. Neither is a realistic option. For the countries such as Greece, Ireland, Spain and Portugal, the savage austerity measures required are unlikely to be palatable and probably won’t work in any case. All roads may lead eventually to debt restructuring.

The real agenda of the bailout is to avoid foreign lenders taking large losses. In aggregate, the exposure of Germany and France to troubled European countries is around $1 trillion. According to the Bank for International Settlements, as at the end of 2009, French banks and German banks have lent $493 billion and $465 billion respectively to Spain, Greece, Portugal and Ireland.

The real purpose of the bailout is to prepare for a possible series of sovereign debt restructuring in Europe. In an ideal world, banks and investors raise capital and write down their exposure to the troubled debtors over time allowing the restructuring to be relatively smooth, avoiding disruption to financial markets.

A combination of self-reinforcing events is driving a pernicious reversal of the dynamics of 2008-09. Then, co-ordinated government action on a grand scale stopped the global financial crisis from turning into a depression.

Government central bank strategy was a bet on growth and inflation, as the most painless means of adjusting the overly leveraged and deeply indebted global economy. Now, governments have become the problem, perhaps calling time on the wishful thinking of markets.

The most important consequence of Greece and European sovereign debt problems will be to force governments everywhere to stabilize and reverse the deterioration in public finances, by a combination of new taxes and cutting expenditures.

Many indebted economies, including Britain and Italy, have implemented austerity measures. The sharp reduction of government spending coincides with the end of the effects of stimulus packages and is likely to slow economic growth.

Refusing to acknowledge the real problems, major economies have over the last decades transferred debt from companies to consumers and finally onto public balance sheets. A huge amount of assets and risk now is held by central banks and governments, which are not designed for such long-term ownership.

There are now no more balance sheets that can be leveraged to support the current levels of debt. The lack of viable policy options is increasingly evident in the panicked reactions of governments.

At best, a withdrawal of government support (through lower spending and higher taxes) will reduce global demand and usher in a potentially prolonged period of stagnation. At worst, increasing difficulty in sovereigns raising money and a clutch of sovereign debt rescheduling may result in a sharp deterioration in financial and economic conditions.

There is no political will to tackle  deep-seated problems. The electorate is unwilling to accept the adjustments and lower living standards that will be necessary. As the credit crisis enters its third year, the scale of sovereign debts means governments now have limited room to counter any new economic downturn and new problems or crisis.

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